When Should You Nickel-and-Dime Your Customers?

This is an MIT Sloan Management Review article. Although standard economic theory (and common sense) dictates that customers should be just as willing to purchase carpeting priced at $500 plus delivery priced at $100 as they are to purchase carpeting with free delivery priced at $600, recent research suggests that price partitioning, the manner in which a total price is divided into components, affects customers' price perceptions, their willingness to purchase and even their likelihood of repurchasing from the same vendor. The challenge is deciding when to charge separately for extras and when to combine extras into a single total price. Whether "nickel-and-diming" your customers or "keeping things simple"is more effective for a specific transaction depends on a variety of factors, such as whether customers comparison shop, whether they are more sensitive to the prices of some components (delivery) than to others (carpeting), whether the price of one component is small or large relative to the others, whether the company controls the costs and quality of a particular component, and which components are most central to the customer's goals. The authors provide managers with a decision framework to determine when to separate what they charge into a number of parts, and when to roll everything into one price.

• Operations strategy
• Operations research
• Marketing